Joel Elsesser - VP of Investor Relations Matt Simoncini - President and CEO Jeff Vanneste - Chief Financial Officer Frank Orsini - SVP and President, E Systems Ray Scott - EVP and President, Seating.

Itay Michaeli - Citi John Murphy - Bank of America Brett Hoselton - KeyBanc David Tamberrino - Goldman Sachs Chris McNally - Evercore ISI Brian Johnson - Barclays Emmanuel Rosner - Guggenheim Colin Langan - UBS Investment Bank Adam Jonas - Morgan Stanley Rod Lache - Deutsche Bank Joseph Spak - RBC Capital Markets Samik Chatterjee - JPMorgan David Leiker - Robert W.

Baird Shawn Kim - Gabelli Jeff Osborne - Cowen and Company, LLC.

Good morning. My name is Alex, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Joel Elsesser, Vice President of Investor Relations, you may begin your conference..

Thanks, Alex. Good morning and thank you for joining us for our third quarter 2017 earnings call. Our press release was filed this morning with the Securities and Exchange Commission, and the presentation for our call is posted on our website, lear.com, through the Investor Relations link.

Today's presenters are Matt Simoncini, President and CEO; Jeff Vanneste, Chief Financial Officer. Ray Scott, President of our Seating Division and Frank Orsini, President of E-Systems. Also participating on the call are several other members of Lear's leadership team.

Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled, Investor Information, at the beginning of the presentation and also in our SEC filings.

We will also be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation. Slide 3 shows the agenda for today's review. Following the formal presentation, we will be pleased to take your questions.

Now, please turn to slide 5 and I'll turn it over to Jeff..

Thanks, Joel. Lear's positive momentum continued during the quarter with record third quarter results across all key financial measures. Sales, core operating earnings and free cash flow, all experienced double digit growth compared with 2016.

Adjusted EPS improved by 24% reflecting our strong operating performance, the benefit of our share repurchase program and a lower effective tax rate. As a result of our strong year-to-date performance and our positive outlook for the fourth quarter, we are again increasing our full year financial outlook.

Slide 6 shows the factors driving our strong revenue growth in the third quarter. Sales grew 10% in the quarter, well above industry growth of 2%, reflecting our record sales backlog, the acquisition of Grupo Antolin's seating business and favorable foreign exchange partially offset by lower production on certain Lear platforms in North America.

Slide 7 shows our core operating earnings for the quarter compared with the year ago. Core operating earnings increased 12% to $408 million with the margin of 8.2%, up 20 basis points from 2016. The improvement was driven primarily by the addition of new business.

From a segment perspective seating margins increased 20 basis points from 7.9% to 8.1%, reflecting favorable operating performance and the addition of the new business.

Margins in E-Systems remained strong at 14.4% but were down slightly from a year ago reflecting the timing of commercial resolutions, as well as development cost associated with our growing sales backlog. Slide 8 provides our updated financial outlook for 2017.

Our outlook is based on the latest IHS production forecast and euro assumption of a $1.17 for the fourth quarter. Based on these assumptions, we are increasing our revenue guidance by $400 million to $20.4 billion. The revised forecast reflects higher European production as well as the strengthening of most major currencies compared to the US dollar.

We are increasing our outlook for core operating earnings by $50 million to $1.7 billion reflecting the increase in sales and continued strong operating performance.

We are increasing our guidance for capital expenditures by $25 million to $585 million, reflecting increased investment to support recent new business of orders and launches at Grupo Antolin as well as latest foreign exchange assumptions. We are also raising our guidance for free cash flow by $50 million to $1.15 billion.

Our effective tax rate is now expected to be approximately 25% for the full year. Now I'll turn it over to Frank Orsini, President of our E-Systems business who’ll provides an overview of some of the growth drivers in the E-Systems segment. .

Thanks Jeff. Please turn to Slide 10. We often describe our E-Systems business as providing the neural network of a vehicle. Our E-Systems portfolio consist of wire harnesses, terminals and connectors and electronic modules that support traditional and high power electrical architectures, as well as connectivity applications.

We expect electrical content per vehicle to increase by approximately 3% to 5% per year on our traditional products, driven by growing consumer demand for additional features in the vehicle that require power and signal management.

Additionally, we are well positioned for accelerated growth with the emerging industry trends that I'll cover over the next few slides. As you can see on Slide 11, industry penetration rates over the next 10 years are expected to reach 75% or more for connected vehicles, and approximately 40% for electrified vehicles.

These two trends followed by the trend of autonomy represent a significant content growth opportunity for Lear.

This year alone new technology associated with these industry mega trends has accounted for approximately few hundred million dollars in incremental new business awards spread across 35 vehicle nameplates with six customers serving three continents. Slide 12 provides some additional details on the opportunity with high power vehicles.

As these slide shows, we have a complete high power product portfolio with scalable power technologies in each of our core product segments. This represents a significant incremental content per vehicle opportunity as high power electronics are additive to traditional electrical power distribution systems.

Our range of capabilities position Lear to capitalize on vehicle electrification trends from 12V start stop to 48V and ultimately to full electric vehicle with growing content opportunities as the level of electrification increases.

We presently have been awarded 48V contract on 29 nameplates across six customers, with a number of these programs launching next year. Currently high power business award represents approximately $150 million in new business over the next three years and quoting for new programs is increasing rapidly.

Slide 13 shows the growth opportunity for connectivity. In 2015, we enhanced our E-Systems product portfolio by adding vehicle-to-vehicle and vehicle to infrastructure connectivity capabilities with the acquisition of Arada Systems and Autonet Mobile.

We now have a complete connectivity offering including advanced capabilities in cellular, V2X, VSRC, Wi-Fi and Bluetooth RF communication protocols. These product offerings position Lear to grow with a rapidly increasing connectivity trend.

Our connectivity offerings are highly synergistic with our traditional electrical distribution capabilities and industry leading electronic modules. Lear's connected gateway modules with over-the-air software upgrade capabilities will launch in 2018 on nine nameplates in Europe representing Lear's first major production connectivity platform.

Lear has the leadership position in V2X infrastructure with more than 26 global deployments across 10 states and five countries. We continue to see increased quoting activity for connectivity solution with our global customers. Now I'll turn it over to Ray Scott, President of our Seating business for an update on growth drivers in seating. .

Thanks Frank. Over the next few slides I'll provide some insight into Lear's strategy and actions to continue to profitably grow our seating business. We believe that our value proposition to our customer is unmatched in the seating segment. We possess most comprehensive seating component capabilities in the industry.

We are also committed to delivering the highest quality products at the lowest possible cost. Our world class low cost manufacturing engine footprint provides a competitive advantage and together with our unique product capabilities is driving market share growth.

We are dedicated to both near and long-term innovation to meet our current future customer and consumer needs. With that as background please turn to Slide 15. The mega trends that Frank discussed of autonomous connectivity and electrification have an impact in nearly every component of the vehicle and seating is no exception.

This slide shows key seating market trends that Lear is addressing as part of our product strategy. Over the last five years, Lear has taken significant steps to expand our seating innovation. We have dedicated resources to innovation and developed methodologies, processes and tools to identify specific opportunities and accelerate development timing.

In short, we are investing more time, resources and energy than ever before on innovation. Some key examples are listed on this slide. I'd like to highlight three major initiatives. Crafted by Lear, Drop and Go and Intu, which is our intelligence seat system.

As you know, we launched crafted by Lear to take our unmatched seat capabilities to our customers design team to help bring their vision for their brands to life in a showrooms.

Crafted by Lear aims to develop beautiful, compelling, cutting -edge seat designs using the most advanced surface materials and act with an executed premium level of craftsmanship. Drop and Go is a reconfigurable seating solution that provides ultimate flexibility. Specifically for CUVs, SUVs and passenger vans.

The next generation of Drop and Go will advance these products into a complete system that includes electrification, drawing on our capabilities and expertise in E-Systems. Enhanced reconfigurability, cargo management and other functionalities will also be benefits.

Finally, you may be familiar with some aspects of Intu which we believe will be the world's most innovative and intelligent seating system.

Based on advancements in electronics, electric systems and sensors embedded in the seat and the rest of vehicle, we have created seating module and features that provide personalized comfort and user experiences like never before. The seat will become the center of occupant information and connectivity.

And all these areas we are already engaged with customers on a meaningful co development for future vehicle applications. Slide 16 shows how we have dramatically increased our capabilities, making Lear the most vertically integrated seat supplier in the industry.

The acquisition of Guilford Fabrics, Eagle Ottawa Leather combined with our trim cover expertise give Lear an unmatched position in service materials.

Other complimentary investments and acquisitions have also broaden our seating capabilities including our investment in Tempronics for seat heating and cooling, and our recent acquisition of the seating business of Grupo Antolin's.

Not only does this full component capability provide opportunities for vertical integration, it also supports the innovation activities highlighted on this page. Many of these innovations are only made possible by the significant capabilities of our E-Systems business.

The next generation of intelligent seating systems requires significant and sophisticated electronics and software which E-Systems provide. No other seating supplier has all these capabilities under one roof. Lear seating is leveraging its E-Systems capability particularly as we innovate for the next generation of seating systems.

Slide 17 focuses on our future growth opportunities in seating. Since 2012 Lear has delivered seating sales growth 5 percentage point above the industry and has become the fastest growing and most profitable automotive seating company in the world.

We've achieved market share gains by leveraging both our superior product capabilities and our industry leading cost structure. As we look at the next five years, we project that our seating business will continue to have very similar growth pace.

We also anticipate that the market trends and innovations I discussed earlier will drive average seating content per vehicle higher. This growth we've driven in part by the emerging market which we believe will add features and content consistent with the matured markets.

Lear's total product capabilities position us well to participate in and benefit from this growth.

Longer term, we see that seats will continue to evolve, adding additional features and becoming safer and more connected .These trends will require significant increase in electrical and electronic content in seating, driving substantial increase in CPV.

In summary, Lear's segment and leading component capabilities, low cost infrastructure and product innovation will drive continued profitable growth. We have the most talented team delivering the best seats at the lowest possible cost every single day. And so thank you and I would like to turn it over to Matt..

Great. Nice job guys. Slide 19 highlights the unique strength of Lear's product portfolio. Both the Lear's business segments are high performing with sales growing faster than the industry production and segment leading margins.

Both business segments are complimentary; we believe that having both businesses together under Lear umbrella will provide the best opportunity for continued profitable growth. In summary, Lear had another great quarter, again reporting record financial results.

The investments that we have made in this business have positioned us to continue to build on this success. We've again increased our full year financial outlook for 2017 and expect our profitable growth to continue due to our unique product capabilities and record backlog.

We have a track record of performance and a balanced strategy of capital allocation that are delivering superior returns to our shareholders. Our strong free cash flow and financial flexibility allowed us to continue to invest in the business while consistently returning cash to shareholders. Now we would be happy to take your questions. .

[Operator Instructions] And your first question comes from line of Itay Michaeli form Citi. Your line is open..

Great, thanks, good morning, everybody. Why don't we just start off real quick just on the fourth quarter? I think you kind of implied margins little bit lower year-over-year, so hoping if you could walk some of the puts -and- takes around the walk into Q4..

Yes. It really comes down to mix, Itay. We are getting a little bit of headwinds on the changeover that we starting to see on the large SUVs. The GM large SUVs and pickup truck platforms we are also seeing some weaknesses in certain past cars going into the fourth quarter. Other than that it's a pretty clean quarter.

If the macros hold we expect to outperform..

That's really helpful. And as we think about kind of preliminary into 2018, Matt, how are you feeling about the overall outlook I think previously maybe actually on the Q3 call last year, expectations of Lear kind of outgrow in the market by 5 points each year.

How are you feeling there? Maybe just other big picture puts and takes we think about 2018..

I feel great about 2018. The industry is strong. It's continued to grow on a global basis. Both our businesses are doing well. We are continuing to win more than our share, business share continues to grow. I think the operating teams are doing outstanding job of running hundreds of facilities around the world.

The macros I think are set off pretty well heading into next year when you look at the major markets whether it's Asia, China specifically, Europe and North America. Even if we see a plateau or flat line as flat lining are pretty high level. Again we would expect the cars we are on to do well. The rotation through the CUVs actually benefits Lear.

So, yes, I am a bull..

Yes. That's very helpful. And just lastly maybe on slide 10, I appreciate the color on E-Systems.

Can you just talk a little bit more about either the win rates you had in high power and connectivity? Kind of what's a competitive landscape look like and how do you feel your win rates are tracking there relative to other components within E-Systems?.

We are doing well there in our product segments. One of the things we want to do with the slide, we show some of our capabilities and highlight some of the things that are happening in the marketplace that can benefit Lear. Frank, can you shows a little bit more color to Itay on this. .

Yes, absolutely. So, Itay, in this particular area high power in general, all three of our product segments benefits from the ability to scale up in power. So 12V architecture, 48V architectures and all the way on to electrified full 400 to 800V architectures are right in our wheel house. So from a competitive standpoint we are competing very well.

We are winning a lot of business as we mentioned in terms of the growth prospects. We just see a continuing, the margins are great and the business we are winning and the business we are winning exceeds our expectations on capital investment and everything that we are working on.

So right now we really like the position we are in; the technology is doing very well for us and we see future growth coming as well. .

That’s very helpful. Thanks again everybody and congrats..

Your next question comes from the line of John Murphy from Bank of America. Your line is open..

Good morning, guys. Just a first question kind of wrapped into the backlog growth, CapEx and sort of developments there. I mean obviously the ramp up in CapEx is, it's not major but I mean it indicates you are winning more business than you maybe had expected before.

So just wondering if you can give us update on the backlog and what kind of growth you are seeing there. And also very simplistically if we saw, I mean it sounds like very simple question but if we see volumes flat next year you would expect your revenue to grow about 5% based on what you know about your backlog right now. .

The last answer is yes. As far as CapEx what you are seeing in the near term CapEx is the business wins, some of the businesses that we are winning is near term if you will John so it's a quicker kind of launch cadence than the normal three year advance. And I'd expect our backlog to be bigger next year than it was this year.

Does that makes sense? Like the three year backlog which we will announce with full details and color in the January at Deutsche conference in Detroit but the capital intensity of business high 2%, I think we've been running about 2.8% of sales. I don't think that trend is going to change meaningfully..

Does that mean that you have won new businesses or some of the programs that you on are sort of expanding in size and scope? Because it's untraditional to win --.

It's both.

Both, okay, that's helpful..

Yes. It's takeaway business in the near term, John. There is also some capital associated with the recent rates.

Some capital associated with Grupo Antolin's acquisition as we got into those plans we saw some things that we think we needed to do as well as consolidating some of the sub tiers into Lear to improve the performance and that's driven a portion of that capital raise that you just -- we just announced in the guidance. .

Okay, that's helpful. And Frank just on page 12 I mean it sounds like this is huge opportunity sort of you get to more high power-trains and ultimately to EVs, you mentioned there is about $150 million in the backlog over the next three years.

Next three years should have some increasing penetration of this kind of high power-trains out there but it's really call it beyond that window as we get out to sort of 2020 to 2025 and maybe beyond where there is some real ramp up.

What do you see the opportunities beyond the next three years for this business and could it be significantly more additive to the backlog than what you are talking about over the next three years which is good but it does sound like there is going to get lot more opportunity well beyond that because we are thinking power-trains you might have some visibility into that already.

.

Yes, absolutely. Yes, you couldn’t have said it better. The opportunities are tremendous. The three year backlog not even completely done either, still some sourcing that we are working on in this area as well. Some programs that are still out for bid.

So we think that this is, a, very near term opportunity for us because when you think of the ACE technology and what's coming our way, electrification is going to be tremendous in terms of CPB. So we see opportunity there beyond the three year backlog. The CPB opportunity we put on the slide for you give you some indications.

As I mentioned, we have opportunities in each one of those areas. So it continues to get better for us in this area. We really believe this is a trend that's going to benefit Lear long term as well. .

Your next question comes from the line of Brett Hoselton of KeyBanc. .

Good morning.

Can you talk a little bit about M&A kind of deal flow valuation and areas of possible interest for your company?.

Yes. At any given time we are looking at numerous opportunities Brett to grow the business something that would increase our capabilities. We are fairly happy with our capabilities in seating. It's hard to think of something we don't have that we would need considering our component capabilities are already the best in segment.

So our primary focus has been in our E-Systems division, things that can help us deliver higher power software cyber are some of the areas that we've been looking at, positioning of the vehicle, that's an area that we continue to look at.

Lot of times the investments we've made like are Arada and Autonet last year is to provide intellectual property, they are smaller but they provide a big value in intellectual property and technicians and software engineers. More to that areas I think similar to those types of acquisitions.

Valuations in this space at times have been silly, everything is more -- it's a higher multiple than Lear [Indiscernible] to be ridiculous, Lear's multiple to be ridiculously low.

That being said, we understand that the valuation a lot of these acquisitions are going to be quite high and in order to play in that space, to get the technology you need and at times you are just going to have to swallow hard and do it. So yes I think that's it. .

Very good. And then can you-- given recent announcements from Delphi and Autoliv that they are going to split their company. I know you addressed and have consistently said that you think there is value in the combination of the electronics with the seating business.

I was hoping you can maybe elaborate on that for us a little bit more simply because again given the Delphi split and given the Autoliv split, we are getting significantly more questions on how the two benefit one another?.

Right. The Autoliv and Delphi splits are different situations than Lear. Whether you are taking a business that you don't want to fund, continued losses or basically breakeven in the case of Autoliv or in Delphi where you have high growth in flat line business.

In our business, the DNA of our business is quite frankly quite a bit different in both segments where we have both outgrowing the market, both generating cash and both leveraging the technology and the product that benefits its both product segment.

From us, first and foremost, we think the capabilities are growing our E-Systems business is best when its underneath Lear's umbrella and by that we mean not only our infrastructure, our shared infrastructure, and the fact that these products are starting to have overlap and I am going to come back to this point, but also because of our capital structure and our investment grade capital structure allows us to invest.

And finally the last piece of it is, I think customers are more willing to source on electrical and electronics firm that actually has $20 billion of revenue and the financial wherewithal and the management that we have as opposed to standalone E-Systems business.

Now, as far as the product conversions, what we want to show on the slide is that most mechanical sub systems of a vehicle over time have become more intelligent. If you take the steering systems for instance, that's now largely electronic base.

We see the same thing happening in seating, it's becoming high power, there is more features, more electronics and it's becoming intelligent and it will become even more so as you see a penetration of more autonomous vehicles.

So it's the first line of connectivity and when you look at the capabilities of Lear, we are in the sweet spot because a lot of the developments that we've done in our intelligence has come from the software and engineering capabilities that we have in E-Systems.

So we see that, now all that being said if we receive a compelling offer that would create long term sustained value creation for our shareholders, we consider it, we understand our producer responsibility for the shareholders to do, to create value as a leadership team this corporation.

But we believe the best way to that right now to keep these two businesses together. .

Your next question comes from the line of David Tamberrino of Goldman Sachs. Your line is open.

Great, thanks for the taking questions here. Matt, one of the things that you guys have acquired into is the V2X platform. And I think you've noted that you have the most in installed applications globally.

What is the medium term opportunity look like for increased deployments there? And on the back of that how is that business currently being monetized? You are just installing the hardware or is it an ongoing service revenues? And then from there what opportunities do you really have in a country like China that's looking to rollout smart infrastructure? So not necessarily just tied to vehicle production but actual infrastructure installations and how do you think about that growth?.

One of this David, one of the side benefits, I'll turn it over to Frank in a second but one of the side benefit is quite frankly is what we learned by doing this deployment. It helps us develop our gateways and our modules from learning how to deploy this things and how the data is being collected if you will through these modules.

But Frank can you just talk about the specific revenue streams and opportunities. .

Yes, absolutely. So for the V2X topic specifically vehicle infrastructure and vehicle-to-vehicle, what we are seeing is the global deployments that we have are really translating into knowledge and information for direct vehicle applications as well. So as we mentioned on a call we are a leader with 26 global deployments.

To answer your question, there is opportunity to expand that position. We are actively quoting right now with certain states in the US and we are actively quoting work in other countries as well. We are already in India in terms of Asia but China is another country that we are speaking to actively right now for this technology.

And that can be said for every space in the world right now. We are working with South America. We are working with Europe as well. So there is a lot of opportunity we believe to continue to expand that but we are really becomes important as Matt said is taking that knowledge from the infrastructure and then deploying into vehicle application.

Your question regarding, yes, its hardware and software today, services is something that we are looking to provide is an opportunity to monetize these capabilities as well.

So the options of putting this technology directly into vehicle are very important to us in the future and it's something that we are quoting actively with certain customers around the world. .

And from penetration standpoint within the vehicle.

I mean where are we at today and where do you think that starts to ramp up in the next 3 to 5 years?.

Well, you know there is some proposed rule making that's in play right now with NHTSA that hasn't fully been adopted yet but that will relate to DSRC or some cellular method of providing data between the vehicles. Lear is prepared for either technology.

So in terms of penetration it's right in the kind of connectivity stuff that we have been looking at. We believe that some of these technologies will allow for the vehicles to communicate between each other. And we are seeing our fair share of quoting right now.

We do believe that in the next few years you will start to see these applications on vehicle. .

Understood. And then just second question for me. We noticed raw material from the copper standpoint continue to come up.

Can you remind us what the indexation clauses you have and how much of a lag there would be for the raw material?.

So on the copper side, you are right. We have seen an increase certainly recently on the price of copper. And copper we are about 90% insulated via the index agreement which tend to run very quickly. So it could be a matter of month to a quarter in between this, the timing of the fluctuation and the impact on our pricing with the customer.

On steel about 90% of our buy on steel is either covered through a purchase agreement with the customer or comes into Lear in a fabricated form from the supplier of adjusters of ranger or what you have and on hide market or leather about 60% is covered directly by an index agreement which has a longer tail to it and the other 40% is generally handled through commercial discussions and productivity and other type of commercial issues.

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Your next question comes from the line of Chris McNally from Evercore ISI. Your line is open.

Hey guys, great quarter, thank you very much for the questions. I am -- I was going to focus on I think the same slide that everyone seems to be focused on today which is the great opportunity within electrical, really on the higher voltage system which is increasing focus of the street right now.

And you gave some big numbers out to 2017, can you sort of put the couple of drivers together and help us understand for the industry and not just for Lear, what type of CAGR do we think we could kind of expect because this has been 3 or 4 points outgrow over the last couple of years but we are clearly waiting for that inflection for when it could be sort of high single digits and some of the back of the envelop math that this could be sort of 10% as you start to get out to the higher forms of electrification.

Or anything that you can -- that you can add to sort of put the trends together so we can see the long-term growth of electrification would be really helpful..

Yes. It's hard Chris to give you a specific point. I know I just as it in high single digit penetrating in over the next five years.

The wildcard now this is legislation, starting with China specifically but every major city seems to now have an initiative or legislation or regulations regarding internal combustion engines in their greater metropolitan areas right. So we are not really sure what is going to come in. We know the rates that we pegged have always been exceeded.

So if we would have been here three years ago I would have told you probably 3%.

Then it starts to get to 5% and now we are running 6% and I just it is approaching 10% and I think that might be the most realistic guideline we can point to but the wildcard again appears to be legislation as people try to or regions try to manage the CO2 emission issue. .

And then maybe Matt if we just use that sort of 10% with the multipliers that you gave, some of the multipliers obviously on CPV with the content going to 2000 per vehicle.

What type of CAGR could we expect if we blended that in for your electrical division? Understanding that you will not have as much growth in traditional wiring plus you have some of the growth in connectivity.

Can we see electrical as an industry and obviously let just say for now that your share remains the same, could growth here as we get into 2020s, move towards the production plus high single digit plus 10%. I am just trying to get an idea for what the outlook of that division is in terms of the acceleration..

Yes, 10% might be optimistic. I probably wouldn't collect or I could be yes if you do math it could be that. I would be more comfortable with the number more like 7. And I think I want to share that but I would probably use that from an investment piece of standpoint. .

Your next question comes from the line of Brian Johnson from Barclays. Your line is open..

Yes, good afternoon, Lear team. Couple questions around E-Systems sort of the housekeeping near term and then longer term one.

First, could you maybe walk through the puts and takes on somewhat of uncharacteristic slight decline in margin for the quarter? Was it product mix? Was it just the production and currency? Was it the copper timing?.

Yes. I think the main driver was-- there was mix -- an erosion with the mix with the pass cars but really last year we had a benefit of recovery, 14.8% was the margin in 2016 in the third quarter which was unusual, this normal seasonality Brian would have brought that margin down to like the lowest margin afore the year of the fourth quarter.

The third quarter with the shutdowns in Europe and in certain cases in North America is usually the weakest quarter. Last year was one of our stronger quarters because we had picked up -- I want to say Jeff about 40 basis points.

Yes. .

40 basis points in margin last year on commercial recovery. This year we had the incremental cost associated with development cost with a growing backlog. So we had to step up our engineering and development cost in that segment. But that was almost secondary to the kind one timer in last year's number, deflated last year's number.

I'd tell you at 40.4% that's a pretty good number for the third quarter when you take into consideration normal seasonality Brian. .

Right. And the production mix..

Right..

On the E-Systems on content opportunity for high power. Could give us a sense of couple few things around that.

What do you see a strategic environment there, competitive environment in terms of -- is it the usual ease other electrical architecture players, does that change with one of your major competitor sending para electronics one way in wiring harnesses and other.

And then you have a lot of players out there coming in from the power train mechanical side and motor side who bundle power electronics into e-drive module.

So just what do you think the competitive environment is? Whether it has strength and what's it's going to mean for margin in that business?.

Well, I can tell you Brian, this is Frank, and we are seeing a very similar competition to what we've seen over the last couple of years, similar players because we are competing for the electrical architecture in many cases for this product line.

So the 40V systems that we are providing can range from high power terminal connectors all the way to a full system where we are doing the wiring, the terminals, electronic module as well.

So in many cases we are seeing similar competition, the competition is similar in terms of scope that we've experienced in the past in terms of competitive pressures and things of that nature. So nothing new there. We don't see any outside entrance today that we are quoting and we are quoting very actively all over the world with every customer.

So and we are successful with the business growth and the wins that we are experiencing and we expect that to continue as well. .

Okay. And is the relationship with the tier 2s in terms of where the value is added? Anything different than your normal thing? I thinking of -- the world and debates around silicon carbide and so forth.

Are you different set of upstream partners or players that you used to dealing with?.

Players we are used to dealing with, in the case of high voltage or high power actually spins to our advantage because we can use more of our Lear terminals and connectors on our product so it's actually internal opportunity to apply more Lear's technology, but we lead the industry in power to size ratio on our terminals and connectors.

And we are selling our terminals to even our competitors and other customers for that reason. For us, we see it is an opportunity but very similar structure in terms of tier 2s that we experienced today. .

Okay, great. And I as an ex consultant it was a great set of slides. .

Thank you, appreciate that. .

Your next question comes from the line of Emmanuel Rosner of Guggenheim. Your line is open..

Hi, good morning, everybody. Just first just a couple of follow up questions on the backlog. Looks like it was particularly strong in this quarter I think.

If I just multiplied by four to be like close to $1.5 billion so just curious if you could update us on where the backlog for this year is shaping up to be and then just making wanted to make sure I understood your earlier comment correctly when you said that you expect the three year number to when you disclose in January to be higher.

So you had $2.8 billion over 2017 to 2019, what you are saying is that we'll have a higher number than that over 2018 to 2020?.

Well, I'll start with the 2017 number Emmanuel. Your math is pretty correct. We are running at about $1.4 billion -$1.5 billion for the quarter and yes we would expect it to approach $2.8 billion.

The comment I was making we expect that the three year backlog will be higher in the years 2018 and 2019 than what we previously discussed but that numbers are pretty consistent overall. .

Okay, understood, okay. Then I guess second question would be on your slide on the content per vehicle opportunity in seating.

You highlighted some very favorable market trends but then at the same time when I look at your slide 17 and then some average CPV growth projection, going from $710 in 2017 to $750 in 2022 is just 5% increase over five years which would be like 1% of gross a year.

So to get your 5% growth a year in seating, do you basically need market share gain?.

Yes. We need market share gain. We also saw component with the market share. In many cases we are selling leather to folks there we don't make this -- we are not -- our competitors they are making the seats. So I think it's both and I also think it's the content opportunities. Ray, any more color you can provide there. .

Yes. I think you hit on it Matt. I mean it's the market share gain we think we are going to have some opportunities in Asia with a split of business in there and a continued market gains we've seen. I mean I think if you look back historically we are at 19%, we are at 22% of the market today, and we see a very similar trend going forward. .

Understood. And I guess just a quick final one. I noticed you no longer have your customary slide showing how undervalued Lear stock is.

Does it mean you are comfortable with the added value?.

Oh we thought about putting it in Emmanuel, we thought we are getting long winded with that but I tried to make a point clear. I think when we talk about that valuation, but yes, you want to give me my spill on that on that.

Well, quite correctly, I think we are probably undervalued at what is the six turn we have been valued as if we just Adient which obviously we are more profitable and growing faster and we also have an electrical and electronics business that is one of the sweet spots some of the major trends.

So, yes, I find it ridiculously one plus by the way, we have a huge track record of performance. And the most experienced and stable management team in the industry. [Multiple Speakers] I put on slide all evidence therefore. .

Yes, just wanted to make sure you are not saying that you are happy with the current valuation but --.

We aren't happy with the current valuation. Yes, I think at a minimal and you've heard me state it and we had on slide before, we are in a minimal one turn too low and when you look at the EBITDA of over $2 billion you can do the math with 68 million share outstanding. It's a significant value upside. .

Your next question comes from the line of Colin Langan from UBS. Your line is open..

Great, thanks for taking my question. Can I circle back on the question earlier on the potential split of the businesses. You get a lot of questions from investors on that. Have you -- I think in the past you've talked about stranded costs if you were to split the two.

Any color around how large that would be? And I think in the last quarter was that tactic which was $400 million, is that still the right number out of change in the quarter but just want to check there as well..

Yes. It is. With respect to the redundant cost, we've estimated that historically roughly a $150 million. So I think your facts are pretty accurate. The tax is above $400 to $500 of tax leakage..

Okay. And in the quarter the K2 effect was pretty weak but your margins held in pretty well.

How should we think about that as we go into 2018? Because I remember the last changeover it seems to have an impact on your margin? Do you think you can manage it now since it's the small part of your business? How should we think about that risk factor?.

Well, I think that the last point you made is probably one of the most important which is it's become much more balanced product portfolio. I think the seating team had done an outstanding job managing the headwinds. Little bit earlier to talk about 2018 but we think we can manage it.

Ray, can you just talk a little bit about what your team is doing to offset those headwinds?.

Yes. We are in a different place than we were prior to the previous launch. We are -- the discipline we have put in place, the capital, the investments we've made in the business, the team that's on the ground, going through all of our launches, we are in a different place. So we are much more confident as we head into 2018 on our launches. .

And just last thing on the tech item. I mean this year it's trending at 25%, I think it was 28% the prior two years.

I mean is there anything unusual this year? Should we think of 25% as the new rate or should it go back up?.

I think what we've seen in the last few years is in and around 26% to 27% and the 25% revised guidance now for the full year really reflects some of the tax planning strategies coupled with where we see the mix of earnings by country versus maybe what we saw earlier in the year.

And an ongoing basis I think you will continue to see it in that, absent tax reforms which is usual wildcard obviously but continue to see in that 25% effective tax rate range. .

Your next question comes from the line of Adam Jonas of Morgan Stanley. Your line is open.

Thanks everyone.

So, Matt, what do you think is more over hyped? EVs or AVs?.

I think they are both hyped appropriately. .

Any one more hyped -- appropriately hyped than another one. .

I think there is level of autonomy that is in the market place today. I think near term you are going to see the penetration of EVs. I think in time you'll see AVs but you still have guys like me driving old cars around.

So hope we will get full autonomous any time soon but you look at Cadillac CT6# which by the way does not have our seat, so it shouldn't be touted but it's really -- it's wonderful feature and I think leading the industry on autonomy right now. So that's an aspect of autonomy that's in the marketplace today. .

Got it. And just a follow up, the topic of vertical integration I mean you have been in this industry for few decades maybe and over that time -- [Multiple Speakers].

Thanks for reporting on that. .

I know is at least as long as I am. So I have been here too so I am a baby but over this time we have this trend of vertical integration, OEMs kind of become if I am exaggerating a little bit more like marketing and design shells and financing companies where lot of the value added is coming from the supply base to your benefit.

I am just - -the question is at a time we are going to reinventing the power train or the software and the architecture and all things that are going on over the next cycle or couple cycles.

A lot of OEMs are looking at the mirror and saying cheese, I got tens of billions of investor capital in architecture and internal combustion that need to be written down over time or have a lot less longevity and I might have unionized employee sitting around what do we do? Either pay him to go away or put him to some other use.

That's a set up for, could we see a slowdown of the trend of vertical integration and potential for some of your OEM customers to become competitors for some systems. Maybe not seats, maybe not full electrical architecture but just at the margin trying to capture some of what they got hollowed out and shelled out over time. .

Yes, I commented slightly different, it's a great question, one that we get from time to time and I think there is some confusion out there. One, I mean we are assuming that they could do it. Meaning they have the tactical capability to do it and a knowledge how to do it. I think a lot of those skills are gone.

Certain OEs do still make seats for instant, certain OEs are touting design seat but the way we look at it is capital and a need to invest in this business to participate and mobility and autonomous is going to be huge.

This is not where you want to be spending your capital and engineering dollars, I think that ultimately we will speak to the trend of further outsourcing effect.

What we are seeing is the folks for instance that do make their seats are looking to monetize that asset to free up the capital and generate revenues so they can in turn put that investment into where they really need it which is the design of autonomous and full power vehicle. So we think it's actually an opportunity not a risk. .

Your next question comes from the line of Rod Lache from Deutsche Bank. Your line is open..

Good morning, everybody. Just first in the quarter you had an $8 million EBIT impact from a $130 million decline in volume and price and that's really good.

I was wondering if you can clarify that has any implications going forward? For example if volumes are flat next year, is there any opportunity for margin expansion or should we be thinking about development cost and launch cost that would mitigate some of that for next year?.

So I think inside that number the impact of the North American volume in the quarter and obviously the mix therein with what happened with the K2 in the quarter. Some of that was mitigated by the benefit we got in Europe where volumes were actually up in the quarter.

So I think the reading there is that the downside impact of that overall volume change was mitigated by some of the performance that we saw in the quarter. And I think maybe that's the takeaway that you can take to a level volume environment next year let say in the third quarter or beyond.

The run rate of the business beyond the volume as you seems to be performing quite well. .

Right. So you would have some performance actually more performance will be flowing through in a flatter production environment..

Yes, obviously. It's much as anything as what carline sell within the performance number or the production number. Our carline selling there that would help but we've always got ability to take cost out of the business, flat would be okay, and flat would be okay. .

Yes. And I think maybe two questions for Frank.

First is could you just clarify what your market share is roughly in high power?.

You are scrambling us -- no, we've actually have that number Rod to be quite frankly. I know -- [Multiple Speakers] it's pretty consistent with our market share and electrical distribution as it is. Although I do think our capabilities are better than even some of the larger players in the space. .

Yes. And it's our fastest growing segment right now too. .

So we don't have that number. We don't have a number for you. I would think so I mean from a standpoint that there are four major players in electrical distribution. Us, Delphi, Sumitomo and Yazaki, and I think our capabilities are at rivals at least all of them and not better than probably two of them. .

And right now we are selling all three of our segments in high power. We got wire harnesses, high power and terminal connectors and electronic modules in the high power range. So it's --.

And it's something -- I would go mid-teen just to be conservative. .

Yes. And I am wondering if maybe you could just address kind of high level question. So how will companies in E-Systems be differentiated do you think in the longer run? Just broadly in electrification ADAS connectivity.

Where would customers regard you guy as stronger and are there disadvantages in not having things like domain controllers or broader capability in software and electronics is some of your peers have suggested?.

So, Rod, I would tell you that I think a lot of it boils down signal and data management. And that's where we are experts. When we put together systems for our customers, we are going well beyond wire now.

We are putting systems together as a system level approach and we are doing wire boxes, domain controller our part of our product offering, we do them for customers today and will continue to do them in the future.

Where we've been ramping up are software capabilities on top of that hardware offering, keeping further optimized, content feature ads and things of that nature.

So as you start thinking towards autonomous vehicles and what those trends are going to look like, we are positioning ourselves as Matt mentioned earlier as V2X positioning, vehicle positioning, being able to provide the signal and data management and movement of those signals throughout the vehicle.

And that's going to come through incremental box content with hardware and software in the vehicles. And right now we are actively quoting DSRC modules; we are actively quoting connectivity modules that will allow the vehicles to speak between each other and back to the infrastructure.

So we see ourselves in this great opportunity in this great spot where as these added systems come on to the vehicle, a, the baseline is going to be higher powered architecture and connected vehicles which place right into the slide that we presented today.

Plus now you layer on top of that incremental functionality of vehicle positioning, the signal and data management to pull signals in and out of the vehicle, that's exactly where we positioned ourselves with the acquisition and where we are going.

So for us it just represents added CPV content as we move forward whether they are autonomous vehicles as a road full there, electrified or connected, we are going to be a player in all three areas. .

So there is no area at the moment that you would say you need to really augment your capability to be at the benchmark level?.

Well, as Matt mentioned Rod we are looking at everyday in terms of software capabilities to continue to layer on. We want to get better in vehicle positioning. We want to get better in vehicle-to-vehicle type software communications. But right now we have the baseline that allows us to participate in these trends.

We are going to absolutely continue to look to increment our capabilities in those areas though. .

Your next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is open..

Thanks everyone. Just wanted to start with, I guess two housekeeping items on the back, on the walks you provided.

Is the backlog still coming in roughly at that 80-20 split you talked about earlier on or is it coming a little bit differently? And then just on the flow-through on the acquisitions, I'm assuming that we still get some of deal costs and maybe some write-ups, and do that the flow-through on that get better in the coming quarters?.

Yes. Let me start with the last part of the question and I'll hand it over to Jeff on this put to backlog. The Grupo Antolin's acquisition had some headwinds this quarter, yes because of some the transition cost but really the main reason there was premium cost associated with some difficult launches in Europe which we in fact to correct itself.

We think that business is going to perform at the CE margins overall once we get it sorted out and some of the premium cost that we incurred in the quarter. .

And on the backlog Joe, I think for 2017 I think it's still running at the same 80:20 CTE system mix.

I think what you will see even in the backlog that's currently published and I think you'll see it likely when we come out in January is there will be a mix shift going the other ways starting in 2018 not to say that these systems will be larger than seating but it's not going to be 80:20, it's going to be more geared towards E-Systems than the 2017 year.

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It will be proportionate just like the lion share of the -- or a lion portion will be seating, it will be disproportionate as it relates to the current revenue split. .

Okay.

By the way, does that 118 also include AccuMED?.

No. That is specifically Grupo Antolin's.

Okay. Okay. And then Frank, if we look at -- I'm sorry, Ray.

If we look at slide 16 on the next generation intelligent seating and the functionality, I was just curious to get your thoughts on the integration of seats with traditional passive safety, especially as we move more towards autonomous vehicles, whether you think that's something that's necessary or even likely to occur?.

Yes. That's a good question and a couple of different points. One, we've been integrating belts and bags forever with our customers on all our seats and we still do that today. The customer is focused on that integration from a safety system from vehicle architecture standpoints. So we obviously work with our customers today.

We kind of seen some ebbs and flows with all belts and seats and those type of safety devices being integrated into the seat and we are working with our customers on those different applications with a number of different suppliers.

Where we see the real opportunity and I do believe that when we look at the passive seat today becoming much more dynamic and smart is in the dynamic safety features within recliners and track.

And that's what we are doing as we have a couple development programs with our customers on how the devices themselves that have been passive become smart and so we are spending a lot of time and effort with our customers on really generating a seat system that is intelligent.

And just going through the whole system that is tied directly to what Frank is working on with biometrics, health and wellness of the seat actually being able to read your anthropometric measurement and get data that is meaningful to that occupant, now personalizing the seat for -- we are not going to -- no longer have a center stack if you have mobility and other right shared device or vehicles where you can individualize your seat for audio, for picking up your smart device.

And so that's really where our focus is. We are still working with our customers on passive restraints and bags but we see a change going to much more smart devices within the seat system themselves. .

Your next question comes from the line of Ryan Brinkman of JPMorgan. Your line is open.

Hi, good morning. This is Samik on behalf of Ryan. Thanks for all the color today and the detail discussion on the content opportunity and the incremental content opportunity on both the segments.

What I wanted to touch -- get your thoughts on is where do we stand in terms the organic research and development spend towards supporting that growth and being able to successfully leverage that growth? I think there was a mentioned that E-Systems had slightly higher investment this quarter as well contributing to the decline in margins.

So how should we think about where you are right now in your research and development expenses? And that we could change materially from here, do we able to leverage this content opportunity that you're outlining?.

Not materially. It is more an engineering focused business or requires more engineering development focus or class quite frankly. You might see a couple tens and you will notice in the SG&A line of the business overall as we move forward.

So, yes, it is a little bit more engineering intense business and it requires a little bit more work upfront but it's not a meaningful change, it's probably I don't know 20 to 30 basis points overall but not meaningful overall to Lear Corporation. .

Got it. Got it. And just for the second and final question. Can you provide us with an update on Eagle Ottawa? I know at the time of the acquisition it was thought to be a product that's more direct at the luxury market.

Have you seen automakers and more in the market segment as well adopt the leather products, et cetera, quite well? And is that driving stuff in the above industry growth for you as well?.

Yes. With respect to Eagle Ottawa I think one thing that was important with Eagle and Gilford and our own capabilities, we have been an in-house design group that can go and work with our customers in the clay studio.

So and what we are seeing as far as trends, you are asking a question, there is a significant opportunity as far as a well crafted executed seat that really pushes the envelop of design to really give the customers a specific brand they are looking for but more importantly we are seeing all kind of exotic material in luxury type materials within the interior.

We know that's a big opportunity for our customers continue to differentiate their product. And so we yes absolutely are excited about. .

And leather continues to penetrate into the baseline vehicles as well as cars become more content, leather is the trend that we would expect to continue. It is growing; it is penetrating not just in the seat but in other component so the Eagle Ottawa addition has been an outstanding acquisition for Lear Corporation.

Not only it does complete building our craftsmanship, it's the people that we gained and the expertise and design that we gain from that acquisition. So it was great from a financial standpoint. It's great from a penetration standpoint and from an organizational standpoint. So it was an outstanding acquisition for us. .

Your next question comes from the line of David Leiker of Robert W. Baird. Your line is open..

Hi, good morning, everyone. Two quick questions here. Matt, some of the smaller players in this base particularly over in Europe seemed to be losing some contracts in the premium space, that's a pretty big area for you and that you dominated.

Is that business that's coming your way or is that going somewhere else?.

We are winning pretty much from everybody but we are getting our share it is -- we are getting of our share of it, David. I think what the car company have started to see we had a question a little bit earlier which is they get the best quality and craftsmanship when they sourcing a holistic manner.

By sourcing Lear both assembly but also the foam and trim and seat covers right, they get a better executed seat I think some of the smaller companies are stumbling on launch and that's an opportunity.

The other thing is happening and specifically in Europe where there is still lot of prominent widely held organization is the need to have the world class quality system and global footprint is also creating an opportunity. These cars sell in multiple geographic locations right. And in many cases multiple continents. So, yes, that's an opportunity.

I won't say it's all coming to us but we are getting more than our share. .

Great. And then just one last one. As we look at the E-Systems portfolio and you have a split between the traditional and the emerging market. And then you listed some market opportunities 2020 to 2027 for that high power and connectivity.

Do you have a similar number for the traditional electrical products groups in A grade and what that market opportunity is in that growth?.

Yes. As we said little bit earlier today 3% to 5% on the traditional products and the emerging market trends are going to create an opportunity beyond that. .

Yes. It was more understandable if you had the dollar number there, the thought I had -- okay we will follow up.

Sure, you are quickly active David now..

I heard the gross number, I was more curious on the dollar number but it's a great quarter, thanks for the opportunity..

Your next question comes from the line of Shawn Kim with Gabelli. Your line is open..

Hey, guys, good morning. Congratulations on the quarter. Thanks for taking my question. Just quick little follow up. You guys -- you mentioned a lot of the opportunities content wise over the next few years.

Wanted to focus on some of OTA updates? I know lot of players don't have that capability, lot of folks are investing lot of their time and efforts into that.

Can you potentially size that up for us? And just to give us some context, there is some reports recently going around that OEs, companies will spending $40 billion to $50 billion in expenses, warranty expenses each year and last year it was a first year where greater than 50% number were, lot of those expenses could have been fixed BOJ software so wondering if you could just help us size up that opportunity, how you guys are plan and monetizing over the next couple of years..

Well, the way we are going to do is we have our traditional core products and we are making them connected product. So we have a gateway product portfolio today. And we are making those connected gateways through over their software capabilities. The companies that we bought back in 2015, they have both given us capabilities to do that.

So the opportunity as you mentioned by making the components upgradeable over the year for software is the ability to do couple of things. Yes, you can reduce the dealership cost because yes you can flash the vehicles for warranty problems or things that might be happening.

It can also provide content opportunities for instrument cluster upgrades, radio upgrade in the infotainment area. And our connected gateway since over top of all the vehicles domain. So we can interface with any one of the vehicle domains including power train infotainment. So that's where you really get the benefit working with Lear.

The other thing is you can also pull vehicle health information off the vehicle and provide that to the customers so they can better develop the vehicles in the future. We are entering the space heavily in 2018 with our first product launch. As I mentioned it's going to be our nine nameplates in Europe as we continue to launch that product platform.

So for us it's a very big opportunity. We are very excited about it because it's a combination of our core products that we are now making connected through software capabilities. And we think it's going to be not only a CPV driver for us as we captured on the connectivity page but it also be a big growth opportunity for us in the future. .

Got it. And just a quick follow up to that question. Obviously lots of companies in Detroit are focusing on software development.

Can you maybe comment a little bit about how you guys are going about retaining town, going out and finding town especially as you are competing with companies out on Silicon Valley? Are you seeing more of a shift towards engineers coming towards tier 1 auto in general? I'd just love your comments on that whether you guys are going about direct acquisitions or if you guys are getting some good pipeline activity as it relates to the talent.

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We have no problem attractive talent to Lear Corporation for a lot of reasons. I think everybody wants to play on a winner and we are that.

Two, the industry , it is a grate time to be in the industry and when you have this conversion of tech and auto, it's the biggest industry in the world and by the way we design really neat product and we provide jobs.

Then you coupled this with it shift to be in Detroit again where we are headquarters we have no problems getting talent from anywhere in the United States to come work for Lear Corporation.

It is competitive landscape and I think the type of demographics that we are looking to attract are attracted by companies that win, that are community minded, that have opportunity and good HR practices and policies which we put a ton effort into it and that's why we have no problem recruiting. .

Your final question comes from the line of Jeff Osborne of Cowen and Company. Your line is open..

Hey, good morning, guys. And thanks for squeezing me in. Just one quick one. A lot of discussion on E-Systems. And I was just curious if you can quantify roughly what the margin premium would be as the backlog moves from the traditional wire harnesses and T and Cs over towards the high power and connectivity that you talked about. .

Probably on average we stand averagely backlog comes typically an incremental margin about 10%, little bit slightly higher for more capital and engineering intensive business. So maybe low double digits would probably be my estimate. .

It is changed now just as the mix over time over the next 5 to 10 years switches more towards high power and connectivity?.

We are really move up, it's a more a function of material and investment. Traditional wire harnesses are not as capital and engineering intensive so they require a lower margin to exceed your cost to capital. Electronics and connectors are more capital intensive and engineering intensive so they would require a higher margin.

So as we shift there is more type of intelligent processes and software driven product, the margin profile would increase over time. So you are correct there. .

Perfect, thanks so much. .

Great. At this point, I think probably only people on the phone are Lear employees and the Lear team. I want to start by thanking the finance team for pulling together all the information that supports the call like this.

Secondly, I want to thank the broader team for the outstanding work and dedication and focus that it takes to post these types of numbers that allow us to have a call as pleasant as today's call. We have headwinds we all know that.

The industry isn't easy but I know if we work together as a team and we communicate and communicate with honesty and transparency and work as a team there is nothing that can stop us. We have the best team in the industry continue to kick ass guys. Thank you..